DealLawyers.com Blog

Shortly after they were approved in August, I blogged about the 2023 DGCL amendments, including the amendment to Section 272 providing that Section 271’s stockholder approval requirements will not apply to a disposition of property securing a mortgage or pledged to a secured party if either the secured party exercises rights to effect the disposition, or, under certain circumstances, if the board authorizes the transaction to reduce or eliminate liabilities secured by the property.

That change followed the Delaware Supreme Court’s June 2022 decision in StreamTV Networks v. SeeCubic (Del.; 6/22). That case involved an insolvent company that entered into an “Omnibus Agreement” under which it agreed to transfer its assets to the company’s secured creditors without stockholder approval. The company’s Class B stockholders argued that their approval was required under Section 271 of the DGCL and the company’s certificate of incorporation. The Delaware Supreme Court overruled a Chancery Court decision and held that the insolvent company’s transfer of pledged assets to secured creditors required stockholder approval.

This Polsinelli alert argues that the DGCL amendment “not only creates a path forward for so-called friendly foreclosures, but may also provide a new mechanism for ‘zombie companies’ to obtain new ownership, de-lever their balance sheets, and return to (or achieve) profitability.” Here’s an excerpt:

Under newly-amended Section 272, a company’s board of directors may authorize an alternative sale so long as: (i) the value of the property to be sold is less than or equal to the amount of liabilities being eliminated, and (ii) the sale is not otherwise prohibited by applicable law. However, a company may opt out of this new provision by expressly requiring stockholder approval in its certificate of incorporation.

Though it is too soon to know the full implications of this amendment, the amended DGCL does provide another tool for at least some Delaware zombie companies to quickly and cost-effectively de-lever their balance sheets through an out-of-court restructuring approved by the company’s board—even over the objection of a majority shareholder or shareholder group. In many cases, a sale of the company’s assets is the most efficient—and in some cases only—way for a company to restructure. By allowing a company’s board of directors to guide the enterprise in accordance with their fiduciary duties, a Delaware board now has a potential pathway towards breaking the logjam and executing on an out of court sale or consensual foreclosure that breathes new life into the zombie.

– Meredith Ervine